An introduction to the extension of the Senior Managers and Certification Regime to all financial services firms

September 13, 2017

The Financial Conduct Authority is changing how people working in financial services are regulated. The Approved Persons Regime is being replaced by the Senior Managers and Certification Regime (SMCR) for all financial services firms, not just banks. This will affect businesses ranging from one person IFAs to asset managers with billions under management.

In July 2017, the FCA published a Consultation Paper on the proposed changes that will affect financial services firms. You can find the full Consultation Paper here.

The FCA recognises that there is a wide range of different business models and governance structures that apply to the broad variety of firms that will be affected by the new regime. There will be a standard set of requirements for all FCA solo-regulated firms, known as the ‘core regime’. But to ensure that the new regime is flexible enough to meet these different structures, there will be extra requirements for a portion of firms whose size, complexity and potential impact on consumers warrant more attention, known as the ‘enhanced regime’. Likewise, firms defined as ‘Limited Scope’ will have a reduced set of requirements.

1. Core regime

The core regime applies to all FCA regulated firms (except “Limited Scope” firms) and consists of three main elements:

i. Use of Statements of Responsibilities - the SMR is intended to close gaps in responsibility, which have previously allowed senior managers to avoid personal responsibility for issues which have occurred under their watch. The regime holds senior individuals responsible for their conduct and for the conduct of persons and areas for which they are responsible. Senior Managers will have a ‘Statement of Responsibilities’ for this purpose, which sets out the areas for which they are responsible and accountable. Firms will need to keep Statements of Responsibility up to date and resubmit them to the FCA whenever there is a significant change to a Senior Manager’s responsibilities.

ii. Introducing certain specific ‘Senior Management Functions’ - so that, as with the current Approved Persons Regime, anyone who holds such a Senior Management Function will require pre-approval from the regulator before performing this role.

iii. Senior Managers will also have a duty of responsibility - this means that if a firm breaches one of the regulator’s requirements, the Senior Manager responsible for that area could be held accountable if s/he did not take ‘reasonable steps’ to prevent or stop the breach. There will be no territorial limitation on the Senior Managers Regime so anybody who performs a Senior Manager role, whether in the UK or overseas, will be subject to the regime.

iv. The introduction of 7 new ‘Prescribed Responsibilities’ - that must be given to Senior Managers and an additional responsibility for Authorised Fund Managers. This is to ensure that a Senior Manager is accountable for the SMCR and for key conduct and prudential risks. The Prescribed Responsibilities for core firms will be:

Performance by the firm of its obligations under the Senior Managers Regime, including implementation and oversight

Performance by the firm of its obligations under the Certification Regime

Performance by the firm of its obligations in respect of notifications and training of the Conduct Rules

Responsibility for the firm’s policies and procedures for countering the risk that the firm might be used to further financial crime

Responsibility for the firm’s compliance with CASS (if applicable)

Responsibility for ensuring the governing body is informed of its legal and regulatory obligations

Anyone who is a Senior Manager will have a ‘duty of responsibility’. Senior Managers should understand what this means in the context of their job.

Senior Managers must ensure that their Statements of Responsibilities are accurate and up to date.

There are also Conduct Rules that will apply to Senior Managers. Senior Managers will need to understand and comply with the Conduct Rules.

b) Certification Regime

The Certification Regime will apply to employees who are not Senior Managers but whose roles involve “one or more aspects of the firm’s affairs, so far as relating to a regulated activity, and those aspects involve, or might involve, a risk of significant harm to the firm or any of its customers”.

Firms will be responsible for certifying these individuals as fit and proper to perform the role assigned to them. Some of the staff in scope of the Certification Regime may have been previously approved by the FCA. The regulator will not approve these people anymore; the objective of the Certification Regime is to reinforce that firms, rather than the regulator, are responsible for ensuring their staff are fit and proper.

The Certification Functions only apply where the firm has people in these roles. This means in practice, it is possible that in very small firms there will be no one in the Certification Regime if there is only a handful of senior individuals (who will be Senior Managers) supported by administrative staff. If a sole trader has no employees, then the Certification Regime won’t apply to them.

It is proposed that there will be the introduction of a new Significant Management Certification Function, for individuals with significant responsibility for a significant business unit. Firms will need to decide whether a business unit is significant based on the size and significance of the firm’s business in the UK, the risk profile of the unit, the unit’s use of the firm’s capital, its contribution to profit and loss account, the number of employees, Certification Functions or Senior Managers in the unit and the number of customers in unit.

c) Conduct Rules – a significant change

A new set of rules will apply to almost every person working in financial services, including Non-Executive Directors and all other employees in a firm, except staff who do not perform a role specific to financial services (such as post room staff, switchboard operators and security guards).

Two tiers of Conduct Rules are proposed. The first is a general set of rules applying to most employees in a firm. The second tier consists of rules that only apply to Senior Managers.

The FCA proposes applying the Conduct Rules to a firm’s regulated and unregulated financial services activities (including any related ancillary activities). For example, an activity carried on in connection with a regulated activity.

In addition, FSMA requires firms to make individuals who are subject to the Conduct Rules aware that this is the case, and train them in how the rules apply to them. The FCA also proposes to require firms to notify it when disciplinary action has been taken against a person because of breaches of the Conduct Rules.

Firms will therefore have two obligations in relation to the Conduct Rules:

training staff

notifying the FCA when there has been disciplinary action taken because of a breach of the Conduct Rules.

A firm must also allocate the Prescribed Responsibility for the firm’s obligations for Conduct Rules in notifications and training.

2. How can we help?

The FCA’s consultation closes on 3 November and final rules are due to be published next year. Although we are waiting for the final version of the rules there are a series of critical steps that firms can take now to ensure that they are best able to implement the new regime.

Fox Williams’ SMCR team can support you through this process including:

advise and train boards and senior managers;

assist with job/function mapping;

revise and assist with the implementation of new contracts of employment;

draft new policies and update existing ones to assist with SMCR compliance; and

deal with the employee relations issues which inevitably come with a period of change.

3. Why can we help?

The Fox Williams SMCR specialist team already has a wealth of experience working closely with clients to advise on implementation of the SMR and the Certification Regime in banks and advising individual senior managers. Examples of our recent work include:

Project managing the implementation of the SMCR for a range of international banks;

Collaborating with HR and Compliance in a number of major high street banks in connection with complex departures for senior managers. This has included procedural and referencing issues and liaison with regulators;